chapter  7
13 Pages

Public Finance and Income Fluctuation

THUS FAR, we have abstracted out the government sector as if the economy were operating under pure laissez-faire. Let us now introduce the government sector into our income system in order to see what effects its economic activity would have on the fluctuation of national income.1 For this purpose we shall make the basic institutional assumption that the system under consideration represents a mixed public-private economy, with the government sector working hand in hand with the private sector. On this institutional assumption, we can narrow the scope of government economic activity to fiscal operations in general and government expenditure and taxation in particular. Here we are rather more interested in the economic effects of changes in government expenditure and taxation, regardless of the actual motives, the non-economic objectives, and the specific policy considerations that might be involved in those fiscal changes. However, we shall indicate certain policy implications for the stability and welfare of a mixed economy.